Things you need to know
- Stocks attempting to find a base – 3996 holds
- Get to know what the ‘Sacrifice Ratio’ is
- Is 3% the new 2%? I think so….
- VIX reveals some angst – but NOT capitulation
- Try the Chicken Provencal
So, Stocks churned…. moving lower and then rallying back only to move lower again as investors tried to recalibrate their mindset after the bombshell we got from JJ on Friday, leaving investors to come to terms with what is now proving to be a more aggressive FED than many previously thought. At the closing bell – the Dow had given up another 185 pts or 0.6%, the S&P down 30 or 0.7%, the Nasdaq lost 125 pts or 1%, the Russell lost 17 pts or 0.9% and the Transports gave back 150 pts or 1%.
Get ready – because you are going to start hearing about a ‘new ratio’……it’s not really new….but when inflation was running at sub 2% – no one cared….but now that inflation is running at 8.5% it suddenly becomes important and it is called the ‘sacrifice ratio’ – and so you ask – what is that? This ratio represents the level of unemployment an economy has to face to bring down inflation. Currently – unemployment is 3.5% and the PCE is 6.5%. (All while the CPI is 8.5%). What the sacrifice ratio tells economists is what unemployment rate do we have to see to get inflation down to the FED’s target of 3%? I know you think it is 2% – That’s what they keep telling you…. I’m telling you – get ready – because the target is about to be re-defined….
Estimates suggest that in order to get the PCE (Fed’s favored inflation guide) down to 3%, we would have to see unemployment approach 6% and that would mean that more than 2 million people (would be sacrificed), they will be out of work…..Which is why 3% will become the new FED target…you see, if they push harder then the unemployment rate would have to go higher…and that would ‘sacrifice’ even more people causing too much pain…..or at least that is the feeling now…..Remember – in 1982 – Volker pushed rates to 21% as inflation was running at 13% and that pushed unemployment to 10% – leaving 10.7 million people on the curb…..Need I tell you what that was like? Find any ‘baby boomer’ and they will tell you the same story…it was ugly….
Now, understand that whenever a rate hike cycle begins – markets become volatile and sometimes erratic – but that doesn’t mean you bail – it just means you become more selective in your names……..….and when the rate hike cycle suddenly becomes even more aggressive than what many were prepared for then the moves can become even more volatile and erratic…..and with inflationary pressures building – no one is exactly sure what’s next – because it’s been 40 + years since we have been in this situation…..and for the past 13 yrs. we have been in a zero rate, money printing, FED bond buying environment….and that is also about to change…..Rates are going up, inflation remains stubbornly high and the FED is about to start reducing the balance sheet to the tune of $95 billion/month beginning next week….and that will add another dimension to what is already an anxious time, but none of this should be a surprise- because we knew this -the only thing we don’t know is how will the algo’s or investors react once it kicks in……But let’s not get ourselves worked up about that just yet. In the end – this rate hike cycle will prove to be tough to manage and for those that still think the FED can manage a soft landing, I would say I don’t think that is possible nor did I ever think it was possible… But hey – never say never.
Treasuries ended the day lower in price – which sent yields up….but the curve still remains inverted….with the 2’s yielding 3.4%, the 5’s 3.25% and the 10’s 3.10%….and all that means is the recession IS coming….the curve has been inverted for 10 weeks now…10 weeks…not 10 mins, 10 hrs. or even 10 days….it’s been 10 weeks…which is 2 ½ months….so unless they change the definition of what an inverted yield curve means – then it just means that we are due for one helluva recession…..(that goes back to the soft landing conversation……not happening…).
Oil – surged higher….rising $4 /barrel or 4.2% closing at $97/barrel……on continued speculation of OPEC+ supply cuts and ongoing conflict in Libya……Then overnight – there was unrest in Iraq and that also caused some concern – Iraq is the 4th largest oil producer so any disruption to their capacity would cause prices to surge – but Reuter’s tells us that the unrest has NOT caused any issues for their production capacity…so oil is churning.
A quick look at the chart – shows that we came off the highs of June…..$115/barrel – traded right down thru short and intermediate trendline supports (~25%) to find buyers at the long term trendline at $88 ish……we bounced around for a month or so and have now surged back up and thru short term trendline resistance at $94.79 only to kiss intermediate term resistance at $98.18….which represents a 15% move up….if we pierce $98.18 (again) then that opens the door to higher oil prices in the weeks and months ahead…recall – winter is coming to the northern hemisphere and Europe is staring at a an empty pipeline as electricity prices go hyperbolic…. I would not be surprised to see us retest the June highs before long…. This morning oil is holding tight at $96.80/barrel.
Gold ended the day at $1750 after testing as low as $1730 an oz…. Yesterday I said that Gold took JJ’s comments in stride…. suggesting that the idea of a FED pivot was very premature…If rates keep rising and then remain elevated for an extended period (as JJ told us) then gold should remain under a bit of pressure – but I still think $1700 is the floor. But once the markets digest the fact that rising rates will cause a marked slowdown and inflation proves to be more difficult to manage – gold will start to shine again…. this morning Gold is holding the line at $1,750/oz.
The VIX which surged on Friday – on the back of that meltdown continued to move up on Monday – closing at 26.05…. suggesting that the nervousness is alive and well…. which just means that investors are coming to terms with what’s next. The VIX though remains well below the highs of June, May, March and January (37 ish) …and that’s good…because while the current level suggests that investors are a little anxious, it is not suggesting complete capitulation – which is what 40 would suggest.
Eco data today includes nothing that I think will move the markets at all…the real action starts tomorrow when we get the ADP employment report…mortgage apps and Chicago PMI. Thursday brings us Manufacturing PMI, construction spending, challenger job cuts and total vehicle sales…and Friday – brings us the NFP report…. but remember – it is also the beginning of the long Labor Day Weekend…. lots of empty desks leave the algo’s in charge….
US futures are higher this morning……Dow futures up 200 pts, the S&P’s up 30, the Nasdaq up 130 pts and the Russell is up 14….Remember – it is the end of August, moves can be and are usually exaggerated going into labor day weekend…..so that is just another reason not to make any dramatic moves if you are a long term investor…if you are a day trader – then none of that applies at all….a day trader loves the chaos and confusion….
Yesterday Minneapolis’s FED President Neely Kashkari – was quoted on Bloomberg telling us that he was happy to see the markets reaction to the Powell speech – saying that finally investors are taking it seriously and any idea that the FED was about to pivot is wrong…… the FED is committed to fix the very problem they helped create…(well, he didn’t take responsibility for helping to create inflation, he is taking responsibility for fixing it) – which is comical….but they are prepping him to become a voting member in 2023, so they want you to get comfortable with his commentary….….Remember – he wants JJ’s job….and he makes no bones about it….
European stocks are all higher this morning…. after taking a bit of a beating the last couple of days…. markets are up about 1% across the board this morning. ECB board member Isabel Schnabel telling us that global central banks MUST act aggressively to ‘tackle rising inflation even if that means dragging their economies into a recession’. There is no eco data today to drive the action.
The S&P closed at 4030 – after testing as low as 4017…. leaving the trendline at 3996 untouched…… Now this morning’s futures action is suggesting higher prices…so for now the trendline has proven to be support. Near term resistance will be found at 4070…. if we pierce that then 4150 would be the next target…. If for some reason – we do a 180 – then support at 3996 is key…. if it fails to hold then we should expect to see us test the June lows of 3625 ish….
Take Good Care
Chief Market Strategist
kpolcari@slatestone.com
Chicken Provencal
This is a great dish and one that you can use for a large gathering – think labor day weekend…..
For this you need: Legs and thighs (on the bone), celery, carrots, onions, garlic, potatoes, olive oil, butter, s&p, crushed tomatoes & white wine.
Pre-heat oven to 325 degrees
Begin by heating up some olive oil and a qtr. stick of butter in a large frying pan. While that is happening – place the chopped celery, carrots, onions and crushed garlic in the bottom of a deep baking dish. Now season the chicken pieces and fry them until they are golden brown all over. Now place in the baking dish on top of the veggies. When you have fried all the chicken – add a dollop more of butter and deglaze the pan with white wine – I used Pinot Grigio. Bring it to a boil and let the alcohol burn off. Pour over the chicken.
Next in the same pan – add the crushed tomatoes – season with s&p and heat up. Pour the tomatoes over the chicken pieces and cover tightly. Place in the oven at 325 degrees and let bake for 30 mins.…. Now peel the potatoes – cut in half and then slice into bite size half-moons. Add to the chicken – let it bake for another hour.
Then remove the foil – turn the heat up to 375 and let it continue to bake in the oven for another 20 mins…. Then turn the pieces of chicken over and let cook for another 20 mins. You want the chicken pieces to brown up nicely.
When complete – remove and serve with a veggie of your choice – maybe butternut squash or green beans – or maybe both and a large green salad. – Delish.
Buon Appetito.
